The US Dollar rally, combined with the ECB’s policies and the Fed’s hint at raising rates in December, is at risk of blowing up a $9 trillion carry trade.

When the Fed cut interest rates to zero in 2008, it flooded the system with US Dollars. The US Dollar is the reserve currency of the world. NO matter what country you’re in (with few exceptions) you can borrow in US Dollars.

And if you can borrow in US Dollars at 0.25%... and put that money into anything yielding more… you could make a killing.

A hedge fund in Hong Kong could borrow $100 million, pay just $250,000 in interest and plow that money into Brazilian Reals which yielded 11%... locking in a $9.75 million return.

This was the strictly financial side of things. On the economics side, Governments both sovereign and local borrowed in US Dollars around the globe to fund various infrastructure and municipal projects.

Simply put, the US Government was practically giving money away and the world took notice, borrowing Dollars at a record pace. Today, the global carry trade (meaning money borrowed in US Dollars and invested in other assets) stands at over $9 TRILLION (larger than the economy of France and Brazil combined).

This worked while the US Dollar was holding steady. But in the summer of last year (2014), the US Dollar began to breakout of a multi-year wedge pattern:

Why does this matter?

Because the minute the US Dollar began to rally aggressively, the global US Dollar carry trade began to blow up. It is not coincidental that oil commodities, and emerging market stocks took a dive almost immediately after this process began.

The below chart shows an inverted US Dollar chart (so when the US Dollar rallies, the chart falls), Brazil’s stock market (blue line), Commodities in general (red line) and Oil (green line). As you can see, as soon as the US Dollar began to rally, it triggered an implosion in “risk on” assets.

This process is not over, not by a long shot. As anyone who invested during the Peso crisis or Asian crisis can tell you, when carry trades blow up, the volatility can be EXTREME.

Indeed, the US Dollar as broken out of a MASSIVE falling wedge pattern that predicts a multi-year bull market.

The market drop in August triggered by China devaluing the Yuan (another victim of the US Dollar bull market) was just the start. Once the US Dollar rally really begins picking up steam, we could very well see a crash.

When Does The Market Breakdown Again? The Answer Is In The A-D Line

A few days ago we explained just how the dramatic divergence between the broader market and the number of stocks which are actually up and leading this rally has become, when we showed a chart of the NYSE advance/decline line overlaid on the S&P500.

The simple explanation of the above is that there are fewer and fewer stocks propelling the market higher. In fact, as we showed yesterday, if one removes just 8 stocks, AMZN, NFLX, FB, GOOG, NKE, ORLY, SBUX and HD, the S&P500 would be the red for the year.

Today, BofA's new chief technician Stephen Suttmeier picks up on this dramatic divergence and gives out the following warning: "A month-long bearish divergence for the US 15 most active advance-decline line has the potential to limit S&P 500 upside." His details:

The weekly global A-D line of 73 country indices in US Dollars peaked on September 5, 2014 vs. a May 15 peak for the weekly closing price of the MSCI ACWI Index, which is also based in US Dollars. The rise in the US Dollar has had a bearish impact on global equity market breadth (many equity markets have done much better in local currencies) and this A-D line has not confirmed the global equity market rally. This is a major bearish breadth divergence and a classic sign of diminishing breadth for global equity market indices.

Suttmeier then warns what our readers are already aware of, however extended to the global market, namely that there now exists "a major bearish divergence for global A-D line in US Dollars"

The weekly global A-D line of 73 country indices in US Dollars peaked on September 5, 2014 vs. a May 15 peak for the weekly closing price of the MSCI ACWI Index, which is also based in US Dollars. The rise in the US Dollar has had a bearish impact on global equity market breadth (many equity markets have done much better in local currencies) and this A-D line has not confirmed the global equity market rally. This is a major bearish breadth divergence and a classic sign of diminishing breadth for global equity market indices.

Most importantly, it appears that historically changes in the A-D line have been a useful advance indicator of major market breakdowns. To wit:

Watch big support on the most active A-D line

Big breakdowns in the most active A-D line preceded or coincided with big breakdowns for the S&P 500 in 2000 and 2007. The key for the US equity market in late 2015 and into early 2016 is for the most active A-D line to hold its support at the August, July, and December 2014 lows. A failure to do so would put in a top for this advance-decline line and increase the risk for a deeper US equity market pullback.

Which means that the central banks, whose only mandate is to keep the global market from crashing, will have to buy - either directly like the SNB and BOJ or indirectly/spoof like the NY Fed via Citadel - much more than just the E-mini and a handful of stocks to give the impression that the market is healthy when in fact, it is not.

Whether they can pull this off will determine if the Fed's long telegraphed "rate hike" is executed, or if come December 16 Yellen chickens out one more time, and the next thing the market will have to look forward to is the inevitable arrival of negative interest rates.

While FANG (Facebook, Amazon, Netflix, Google) has become ubiquitous among the retail investing public still 'trading stocks', now it is time to meet NOSH (Nike, O'Reilly, Starbucks, Home Depot). The reason is simple -without these 8 stocks, the S&P 500 would be down year-to-date..."solid foundation" for the next leg in the bull market? Or teetering inverted pyramid scheme?

Finally, we couldn't help but notice that this list of 8 stocks is basically all the names that Jim Cramer is jamming down retail investors' throats (and thus hedge fund momo chasers) as the only stocks "that work." Such 'weak' hands do not bode well if this whole ponzi scheme turns down once again.

FRA Co-Founder, Gordon T. Long interviewed Robert Blumen, noted follower of the Austrian School of Economics, on the Core Tenets of the Austrian School and the Key Elements for investing in an Era of Financial Repression.

CORE TENETS

1. All economic understanding must be based on individual action 2. Subjective valuation drives prices 3. Marginal utility 4. Entrepreneurship 5. Time preference as the basis of interest and profit 6. The role of capital in production 7. Savings is required to create capital 8. Price Theory: – prices determine costs, not the other way around 9. Money as an evolutionary solution the problem of barter 10. Precious metals as an evolutionary solution to the choice of the best money 11. The purchasing power of money as a price that balances money supply and money demand12. Non-neutrality of money (Cantillon effects)13. The importance of money prices14. Money is a good, and like any good, money does not have constant purchasing power. Stable money does not mean stable prices.15. Mises’ “critique of intervention”: one thing leads to another16. The “impossibility” of socialism (central planning)17. Macro-Economics must be founded on micro economics18. Macro-economics is based on Say’s law.19. The rejection of the Keynesian revolution in macro.20. Money and money substitutes (bank deposits, bank notes).21. Banking with 100% gold reserves22. Fractional reserve banking. The Austrian critique of fractional reserve banking23. Central banking. The Austrian critique of central banking.

a. Inflation is not just rising prices, it distorts production as well.b. Distortions are unsustainablec. The “crack up bust” as one possible ending to the unsustainable boom

25. Deflation:

a. Deflation has been demonized by the Keynesians.b. Natural slow deflation is the result of increasing production.c. Deflation is the correction process from inflation.d. Deflation is not a mouse trap that the economy gets stuck in and cannot escape.

26. An Austrian understanding of recessions and depressions through Say’s Law, entrepreneurship, and market price theory

KEY ELEMENTS IN AN ERA OF FINANCIAL REPRESSION

1. Entrepreneurs create wealth by employing scarce resources in production within the context of the price system.

This requires real markets with real prices.

2. Central planning can not replace market prices.

3. Central bankers have it backwards. Counter-cyclical policies create the business cycle.

4. Interest is not a number you can set to anything you like for “policy” reasons. It is a price and it cannot be zero.

5. Attempting to keep interest rates at zero creates unsustainable distortions in the productive part of the economy.

6. Something that is unsustainable must stop - at some point.

7. In the end there are two choices – market prices or destruction of the monetary system

Tipping Points Life Cycle - ExplainedClick on image to enlarge

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

THE CONTENT OF ALL MATERIALS: SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.

The Media is not a solicitation to trade or invest, and any analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading and investing can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentary is only the opinions of the authors and should not to be used for investment decisions. You must carefully examine the risks associated with investing of any sort and whether investment programs are suitable for you. You should never invest or consider investments without a complete set of disclosure documents, and should consider the risks prior to investing. The Media is not in any way a substitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement of this Disclosure and Terms of Use Statement is a condition of access to it. Furthermore, any investments you may make are your sole responsibility.

THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he encourages you confirm the facts on your own before making important investment commitments.

DISCLOSURE STATEMENT

Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

Please note that Mr. Long may already have invested or may from time to time invest in securities that are discussed or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.

If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.